Tax delinquency penalties arise in three instances: (1) when there is failure to file a timely tax return; (2) when there is failure to pay tax reported on a return; and (3) when there is failure to pay an assessed tax required to be, but not shown, on a return.  

Failure To File Tax Penalty 

For failure to file a timely return, the Internal Revenue Code imposes under Section 6651(a) a penalty amounting to 5% per month, up to 25% as a maximum constituting five months. The imposition of the failure to file tax penalty is on the net amount due to which the taxpayer is entitled. It will accrue when the taxpayer failed to file one or all of the returns on the date prescribed with extensions granted. Unless the taxpayer can show that such failure is due to reasonable cause and not to willful neglect, the delinquency penalty will not be imposed and demanded. 

Failure To Pay Tax Penalty 

As for the failure to pay tax reported on a return, a delinquency penalty is imposed when there is a failure to pay the “self-assessed” amount shown on a filed return and any assessed tax within ten days after the date of the notice. The penalty is 0.5 percent for each month of the delinquency up to a maximum of 25 percent or 50 months. There will be no penalty if the taxpayer will pay the taxes within 21 calendar days from the date of the notice and the demand, or within ten business days if the corresponding amount is $100,000 or more. The penalty will likewise not accrue when shown that the failure to pay the tax or deficiency was not due to willful neglect but due to a reasonable cause.  

Fraudulent Failure To File Tax Penalty 

When there is a fraudulent failure to file a tax return (FFTF penalty), the imposition of the delinquency penalty is increased from 5% to 15% per month, up to 75% of the net amount due. The burden of proof is on the IRS to prove the element of fraud for the increased portion of the penalty by clear and convincing evidence. Failure to show fraud committed by the taxpayer will only make the taxpayer liable for the regular failure to file delinquency penalty – not the FFTF enhancement. Moreover, the taxpayer can raise the defense of reasonable cause and absence of willful neglect in refuting the element of fraud. 

The common ground of avoiding these three delinquency penalties is for the taxpayer to show the absence of willful intent in neglecting and failing to pay taxes due to a reasonable cause. At best, taxpayers must always be mindful in filing the correct and complete return and paying the taxes due on their respective returns to avoid any penalty assessments from the IRS.  

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